Low Issuance Fuels Muni Market Gains Despite Fund Outflows

Municipal bonds managed to post a pretty strong April, with the broad muni market gaining 1.2% on average, even as municipal bond mutual funds continue to struggle attracting investor cash. Chris Mauro, head of U.S. municipals strategy at RBC, says investors aren't finding muni yields too attractive right now, and they're looking more to high-yield munis as an alternative:

While we had anticipated a pick-up in muni flows once the April 15 tax date had passed, the drop in municipal yields since late March, combined with rich muni/tsy ratios, has dampened investor enthusiasm for the municipal asset class.... This week's fund flow report confirms that low rates continue to encourage investors to move down the credit curve in a search for yield, as municipal high yield funds recorded their 17th straight week of inflows. High yield funds experienced $244 million of net inflows this past week, up slightly from the $234 million in inflows posted in the week ended April 23, 2014. Over the last 17 weeks, high yield muni funds have amassed $3.34 billion in net inflows.

Mauro points out that an unusually low volume of newly issued muni bonds contributed to the market's strong April showing:

The combination of a manageable new issue calendar, constructive municipal fund flows, and minimal selling pressure from retail accounts allowed municipals to outperform Treasuries for the month.... Although municipal supply typically tapers off between the end of Q1 and the start of Q2, April experienced a sharp 18% month/month decline, more than double the average March to April drop of 7.6%. Additionally, April's headline number was also down 40% yr/yr, with total new issue volume struggling to reach $23 billion for the month.

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